An Overview Of Personal Guarantees

A personal guarantee is a commitment made by an individual to take responsibility for fulfilling the obligations of a borrower in the event of default by the borrower. This type of guarantee is usually issued to provide additional security and comfort to the lender that in the event of default, it can either choose to pursue the borrower or the guarantor. 

When a business owner or a director of a company signs a personal guarantee, they are essentially pledging their personal assets as collateral for the loan or lease. This means that if the business is unable to repay the debt, the lender can pursue the owner's or the director’s personal assets, such as their home, car, or savings to recover the amount owed. 

Types of Personal Guarantees 

1. Unlimited Personal Guarantee: In this guarantee, the amount is not capped and the guarantor is liable for the full amount of the debt including any interests accrued. 

2. Limited Personal Guarantee: This type of guarantee limits the guarantor's liability to a specific capped amount or percentage of the debt. This is common practice where there are joint guarantees for instance each director may limit their own liability to a percentage of a debt. 

Enforceability of Personal Guarantees 

It is worth noting that the presumption of liability in case of default by the borrower accrues once the guarantor executes the guarantee agreement, consequently, the guarantor after signing cannot question the terms negotiated by the borrower and the lender, this was stipulated in the case of Robert Njoka Muthara & another v Barclays Bank of Kenya Limited & another. 

In case of default the lender is free to choose which debtor to pursue therefore, the lender need not pursue the principal debtor/borrower first and a default notice to the guarantor is sufficient for liability to attach under a guarantee agreement, this was affirmed in the case of Kenindia Assurance Company Limited v First National Finance Bank Limited. It’s therefore important as a guarantor to ensure the principal debtor adheres to the terms of the loan to avoid taking up the liability. 

Where there is a joint and several guarantee, a collective responsibility arises and the lender is at liberty to elect to recover the whole amount from any of the guarantors and each one of them is liable to settle the full liability. However, in a purely several liability each guarantor is only liable to settle the sum due to the tune of the liability. 

It is therefore important to seek legal advice in the preparation of the guarantees to ensure their enforceability and validity as a guarantor is only liable to the extent of the scope set out in the guarantee agreement.  

Conclusion 

Personal guarantees can be a useful tool for securing financing, however, business owners and company directors should carefully evaluate their ability to fulfill these commitments and seek professional advice to mitigate potential pitfalls. 

It is also important for the lenders to ensure that the guarantees are properly drafted for validity and enforceability in the event of default and prevent instances of loss of security.